1. Opportunity Cost

2. Incentives
Economists always think about incentives. They believe that people respond to incentives - that they weigh the costs and benefits rationally. 14

3. The Decision-Making Grid
Economists encourage us to consider the benefits and costs of our decisions.
Benefits
Enjoy more sleep
Have more energy during the day
Better grade on test
Teacher and parental approval
Personal satisfaction
Decision
Sleep late
Wake up early to study for test
Opportunity cost
Extra study time
Extra sleep time
Benefits forgone
Wake up early to study
Alternatives
Karen’s Decision-making Grid

4. Imagine that you have an extra hour of free time this evening
Imagine that you have an extra hour of free time this evening. Make a list of 5 to 10 things that you could do with that time.
Alternatives
Benefits
Trade-offs
Ex. Go to movie
Ex. Take a nap
Ex. Study for econ

5. Thinking at the Margin
When you decide how much more or less to do, you are thinking at the margin.
Options
1st hour of extra study time
2nd hour of extra study time
3rd hour of extra study time
Benefit
Grade of C on test
Grade of B on test
Grade of B+ on test
Opportunity Cost
1 hour of sleep
2 hours of sleep
3 hours of sleep

6. Trade off- the sacrifice of one thing in order to have another
Opportunity Costs
What would you give up for something you want?
Trade off- the sacrifice of one thing in order to have another
Opportunity cost- the cost of the trade off or the value of the next best alternative that is given up
Business must make decisions when they decide what to do